Renewable Energy in the Philippines

Source: Wiki Commons, Zachary Harden

The Philippine archipelago is made up of 7,107 islands, 2,880 of which are inhabited, located to the south of Taiwan and the north of Indonesia. Due to its relatively small indigenous energy exploitation, the Philippines relies on imported energy sources. Imported coal and crude oil accounted for 50% of the total energy supply in 2007, in addition to the domestic coal and natural gas production. Yet, the country owns rich renewable energy resources, including robust wind energy sites, ideal solar conditions, and an abundance of geothermal and biomass resources. Where is the Philippine renewable energy market at as of early 2011?

The Philippines’ electrification paradox

According to the government, in 2008, the country’s barangay (rural neighbourhood) electrification level reached 98%. In reality however, the figure is much lower. The reason is that the statistics considers all partially or part-time electrified communities as fully-electrified areas. It is therefore very difficult to ascertain which communities do not actually have a permanent access to electricity and thus to the need to electrify them.

What is at stake here is the community’s economic life. Without permanent power, it gets difficult to conduct economic activities and bring in capital income. Energising the community therefore becomes a critical aspect of the economy’s dynamism. However, a number of consents are required in order for a power utility to electrify an area in the Philippines. The electrification has to be done at the barangay level, but to that end national, provincial and municipal consents are required beforehand. Since the government considers most communities as electrified already, there is little reason for the Department of Energy to give its consent for electrification projects. The communities’ economic lives seem therefore meant to be minimal.

Nevertheless, a subsidy programme for electrification projects is still in place. The Universal Charge – Missionary Electrification (UC-ME) programme established a tax, paid by end-users. The proceeds are used by the National Power Corporation’s Small Power utility Group (SPUG) to subsidise small power projects in remote parts of the country. In order to incentivise the electrification of a rural community, the government offers to bring down the community’s electricity tariff to the cheaper urban level, thus subsidising the cost of power in rural areas.

This policy however creates a market distortion on supply and demand, and poses stability concerns due to its political ties. Importantly, existing regulatory hurdles that slow the process as well as high transaction costs disincentivise the private sector from investing in rural electrification projects.

The Renewable Energy Act 2008, a solution?

The fuel crisis that erupted in 2008 compelled the Department of Energy, responsible for overall policy goals in the energy industry, to design a Renewable Energy Act. Its aim is to promote the development of renewable energy resources and their commercialisation to achieve national energy security, as well as to create a competitive environment and empowerment of the consumer; reduce the Philippines’ greenhouse gas emissions through the promotion of sustainable energy measures; and reduce energy imports in order to achieve self-reliance. These targets are being pursued thanks to the provision of fiscal and non-fiscal incentives to private sector investors and equipment manufacturers and suppliers.

At the consumer level, the Renewable Energy Act encourages the consumption of renewable energy through a green energy option allowing end-users to choose renewable energy power sources. The Act also promotes net metering to allow end-users to generate their own renewable energy power to sell it to the grid. Finally, it encourages VAT-free renewable energy power. Moreover, all savings from the reduced corporate tax rate are passed through to end-users via cheaper electricity rates.

The final goal of the Act is to achieve the Philippines’ greater energy independence, by making the country 60% energy self-sufficient by 2010[1].

As a result, electricity generated from renewables in 2010 represented 33% of the Philippines’ energy mix. The government aims to increase the share of renewables to 40% by 2020. Moreover, under the DOE’s medium-term RE Policy Framework, the government aims to achieve a 100% increase in renewable energy power capacity by 2013 compared to the 2002 level. More than 4GW of additional RE capacity are planned to be developed by then, some 1.2GW of which are planned to come from geothermal sources, to reach a total capacity of 9GW.

A challenging implementation

The fiscal and non-fiscal incentives addressed to renewable energy investors have been well received, as the 200 renewable energy projects contracted between the Department of Energy and the private sector in 2009 can testify. However, barriers remain against the implementation of these projects, such as the high risk of renewable energy investments, or the difficulty to find funding, and thus 60 of these projects were cancelled in the months following the passing of contracts.

As it is mandatory for all projects to be registered when first developed, even those projects that are not being implemented because of a lack of funding, they officially still exist. This is a source of some confusion in the sector and leads to price rises, wrong expectations, and delays. The positive aspect of this mandatory registration is that it also creates a triage process, allowing companies to take over stagnant project and thus increase the number of implemented schemes.

Even though it remains difficult to develop successful projects due to many institutional barriers, the incentives clearly created a new platform as well as a huge interest for the private sector.

Case study: PowerSource and the Renewable Energy Act

The PowerSource Group is an energy company working in the Southeast Asia and Pacific regions, specializing in the application of hybrid distributed generation solutions for corporate institutional energy management (PowerSource Energy Services) and rural electrification and community development from renewable resources (PowerSource Micro-Grid Operations). PowerSource is engaged in energising work in the Philippines, as the country’s only third party eligible to energise a community in all steps of electrification, from generation to distribution and collection.

PowerSource works with the communities on installing the energising systems following a build-own-operate model. Once the system is in place, PowerSource operates it for 10-15 years in order to recover the costs and investment. Once the cost of the system is recovered, PowerSource hands its operations to the community, previously trained for that purpose. Thanks to the new electrification system, the community life is improved as a whole: productive hours are extended, children can study thanks to provision of lighting, and health is improved thanks to safer cooking means. Energising a community thus has a huge socio-economic impact.

Before the implementation of the Renewable Energy Act, structuring large elements of renewable energy projects was a difficult enterprise because of the high capital costs. While the renewable energy fuel is cheap, if not free, its initial equipment cost is high compared to the cost of fossil fuels technologies. Without any market mechanisms, such as feed-in-tariffs, renewable energy projects remain too expensive and thus rare.

The Renewable Energy Act of 2008 introduced a 50% increase of subsidy for renewable energy projects, compared to community off-grid systems using non-renewable energy. Although PowerSource’s competition was very limited before the Act’s development because there was no attention on the topic, this new measure had a positive impact on the company’s business, by enabling the development of a market model with a sustainable finance future.

To conclude, although the Philippines aspires to be a regional leader in the renewable energy field, the barriers discussed explain why the Philippine renewable energy market, against the appearances, is still in its infancy. Furthermore, energy efficiency still lacks traction, despite the importance to start economising energy before adding renewables to the mix. Energy efficiency plans are indeed more commonly seen in developed countries and remain rare in developing and emerging countries as they correspond to a more advanced society model. However, the lack of energy efficiency policy represents a barrier to the overall uptake of sustainable energy in the Philippines. Further regulatory developments are therefore awaited in order to enforce the Philippines’ sustainable energy sector in the forthcoming years.

For more info about the Philippines Renewable Energy Act, read REEEP’s article here.